Entry of Foreign Airlines Will Benefit Travelers

The current rush of airlines entering India follows the lifting of investment restrictions. Abu Dhabi-based Etihad received approval from the Indian cabinet for its plan to buy a 24% stake in Jet Airways (India) Ltd.

The entry of foreign airlines into India will be a boon for passengers, but it creates potential problems for the health of the domestic industry.

Three foreign carriers have announced plans to begin operations in India. The increased competition will help drive down fares, analysts say.

“It will give more traveling choices, dense network, competitive fares and improved service standards,” said Kapil Kaul, chief executive for South Asia at CAPA-Centre for Aviation, an aviation consultancy.

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Singapore Airlines Ltd., AirAsia BhD and Etihad Airways plan to start operations in India, in partnership with local companies.

The current rush of airlines entering India follows the lifting of investment restrictions by the government in September last year. Foreign airlines previously were barred from investing in Indian carriers, because the government feared that local companies would be taken over by foreigners.

The investments come as the domestic industry is picking up. More Indians are flying and airlines are able to charge higher fares.

The rise in fares is mostly driven by reduced capacity. The grounding since last October of Kingfisher Airlines Ltd., due to a cash crunch, led to a sudden shortage in plane seats.

While the entry of more competitors will be good for consumers, it may be bad for the overall health of the domestic industry.

Most airlines struggle to remain profitable, plagued by high operating costs. Prices of jet fuel account for around 40% of an Indian carrier’s operating costs, and are more than a third higher than in Dubai or Singapore. Airports fees at most of the major airports are higher than their foreign counterparts. The sector is also highly capital intensive, with plane orders typically costing billions of dollars.

To keep costs low, AirAsia India will have its base in the southern metropolis of Chennai, with additional hubs in Kochi and Bangalore. The airline plans to avoid popular (and profitable), but expensive routes to Delhi and Mumbai.

Keeping costs down will be an essential component of staying profitable in India.

“The (aviation) companies are prone to becoming distressed assets due to their cost structure related inefficiencies driven by taxation and regulatory issues, high financial leverage and chronic cash flow generation issues,” India Ratings & Research Pvt., formerly known as Fitch Ratings India, said in a recent report. High taxes on jet fuel in India erode operating margins by around 12%-18%.

The entry of new competitors could spark a price war, which will be good for travelers in the short term, but worrisome for the long term health of the domestic industry, the report said.

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